Dive Brief:

• Inflation persisted last month well above the Federal Reserve’s target, with a 0.6% gain in shelter costs fueling more than half the increase in price pressures, the Labor Department said Thursday.
• The core consumer price index excluding volatile food and energy prices rose 0.3% in September, matching the August pace and exceeding the 0.2% rate in June and July, the Labor Department said. The index increased at a 4.1% annualized rate, far below the torrid pace last year but still outrunning the Fed’s 2% goal.
• “Core inflation has steadily ticked higher over the last three months,” Olu Sonola, head of U.S. economics at Fitch Ratings, said in an email. “Housing inflation will need to decline sharply over the coming months for us to see inflation near 2%.”

Dive Insight:

Since deciding to hold the main interest rate steady on Sept. 20, Fed policymakers have highlighted progress in their 18-month fight against the highest inflation in four decades.

“Suddenly in the past few months, we’re finally getting very good inflation data that we wanted,” Fed Governor Christopher Waller said Wednesday. “If this continues, we’re pretty much back to our target” of 2%.

Fed Vice Chair Philip Jefferson and other central bank officials — while underscoring the need to slow inflation in services costs — have flagged the risk of tightening too much.

“We are in a sensitive period of risk management, where we have to balance the risk of not having tightened enough against the risk of being too restrictive,” Jefferson said Monday. “The balancing of these two risks was a good reason for holding the policy rate constant” on Sept. 20.

A rise in the yields for long-term Treasurys since the meeting last month has complemented Fed efforts to raise borrowing costs and corral inflation, several policymakers have recently said.

“The financial markets are tightening up, and they’re going to do some of the work for us,” Waller said.

Since policymakers met last month, the yield on the 10-year Treasury note has risen about 0.4 percentage points to 4.7%. The yield is the benchmark for corporate bonds, auto loans, mortgages, student loans and other financing.

Policymakers “may now want to extend the pause to [their scheduled meeting in] December, given the recent increase in long term rates,” Sonola said.

Fed officials during their September meeting differed over whether they should further increase borrowing costs later this year. They have pushed up the federal funds rate since March 2022 from near zero to a range between 5.25% and 5.5%, a 22-year high.

After the release of the inflation report on Thursday, traders in interest rate futures reduced the odds that the Fed will not raise the benchmark rate again this year to 66% from 72% on Wednesday, according to the CME FedWatch Tool.

Minutes from the meeting of policymakers, released Wednesday, supported bets that the Fed will tighten further.

“Most participants continued to see upside risks to inflation,” the minutes said.

Fed officials cited “the imbalance of aggregate demand and supply persisted longer than expected, as well as risks emanating from global oil markets, the potential for upside shocks to food prices, the effects of a strong housing market on shelter inflation and the potential for more limited declines in goods prices,” according to the minutes.

The news on inflation in September was not all bad. Prices for commodities excluding food and energy commodities fell 0.4%, led by declines in used vehicles and apparel of 2.5% and 0.8%, respectively.

Also, the annualized rate for core CPI fell from 4.4% in August to 4.1%, the lowest level in two years. Headline CPI, which includes food and energy, rose 0.4% in September compared with 0.6% in August.

“The bigger picture is that the trend is still quite encouraging, but the fight continues,” Sonola said.